≡ Menu

Accumulation units – the income tax loophole that never was

Are you an unwitting tax evader? I only ask because quite a few investors seem unaware that fund accumulation units attract income tax on dividends just as much their more transparent ‘income unit’ cousins.

  • Accumulation units are a class of share that automatically reinvests dividends or interest straight back into your ETF, or mutual fund.1
  • In contrast, income units cough up dividends directly, paying you cash like three cherries on a fruit machine.

But not physically taking delivery of your dividends is no protection from HMRC. The taxman still wants his cut.

Dividends rolled up into your accumulation units are known as a ‘notional distribution’. They are taxable in exactly the same way as income units.

In other words, you owe income tax even on ‘accumulated’ income unless:

  • Your dividend income is covered by your tax-free Dividend Allowance. Any dividend earnings above that are subject to dividend income tax, regardless of whether they’re tucked away in an ‘Acc’ fund.
  • Dividend income is also tax-free where you have spare Personal Allowance. Perhaps you’re a FIRE-ee who no longer pulls down a salary. 
  • Interest income can be sheltered by your Personal Allowance, Starting Rate for Savings and Personal Savings Allowance.
  • If your accumulating funds are held within an ISA or SIPP then they’re off the taxman’s radar.
Accumulation units are no protection from the taxman

The taxman cometh

Some investors are likely paying tax twice when it comes to their capital gains tax bill on accumulating funds.

You don’t have to pay capital gains tax on the dividends and interest that have fattened your fund.

So when you come to fathom the capital gains on your accumulation funds (and as your resultant psychic scream reverberates around the universe), make sure you deduct any reinvested income from the total gain. Otherwise you’ll be overpaying.

Record collection

Of course, you can only make those deductions if you’ve been meticulously recording the dividend distributions that dropped in to your accumulation funds over the years.

And who doesn’t do that…?

The problem is accumulation unit distributions are more stealthy than income unit payouts. You don’t get to do a little dance every time those divis turn up in your trading account.

So where can you find out about them?

  • In your broker’s statement, if you’re very lucky.
  • Trustnet keeps a good account of accumulation unit distributions. Find your fund then click the dividends tab.
  • In your fund’s annual report.
  • Using Investegate’s advanced search. Set categories to ‘dividends’. Set the timespan to ‘six months’ or whatever suits you. Search for the company name of your fund. Enjoy!

Worth the hassle?

The main advantage of accumulation funds is to skip the cost of reinvesting dividends. But this cost saving is rendered superfluous if your fund isn’t saddled with trading fees or a high regular investing minimum. Many tracker funds fall into this bracket.

On the other hand, accumulating funds mean that your income is reinvested straightaway without you having to lift a finger. That’s a godsend if you prefer the hands-off approach. 

Some people prefer to hold income units outside of a tax shelter. The dividend payouts can be used to rebalance, or to pay tax bills without you having to sell units and trigger capital gains woes if you breach your exemption allowance.

Whichever way you go, just remember that any accumulation units in your portfolio are not immune to income tax.

Start recording those dividends – just for the fun of seeing what you’re earning, if nothing else.

Take it steady,

The Accumulator

P.S. – Watch out for the excess reportable income tax snare if you own offshore funds (including ETFs) unsheltered by your ISAs or SIPPs. 

  1. I’ll just refer to funds from now on, but note this refers to ETFs, OEICs and Unit Trusts. []

Receive my articles for free in your inbox. Type your email and press submit:

{ 40 comments… add one }
  • 1 Pete Comley May 16, 2012, 3:07 pm

    This is a really useful article. I have plugged that people read it in v1.1 of the Monkey with a Pin book.
    Pete

  • 2 The Accumulator May 16, 2012, 5:09 pm

    Much obliged, Pete. Have got Monkey With A Pin on my ‘to read’ list.

  • 3 LearnFrench December 13, 2012, 2:46 pm

    Thanks for explaining this. It did spur me to think of a question however. If one had money in a fund with no fees for investing or withdrawing money (as I believe is the case with the HSBC trackers) then would it be possible to avoid income tax by selling shares in the fund just before the dividend paid out and purchasing them back afterwards. Given that the share price moves to reflect the dividend amount the fact that one has not received the dividend payment should not matter.

    I am assuming here that this would all take place within one’s capital gains tax allowance and not incur any charges in this way.

  • 4 The Accumulator December 13, 2012, 6:59 pm

    Hey, LearnFrench. That sounds like a cunning ruse, but I worry that your shares could freefall after you’ve bought them back and you end up making nothing at all. Or, for whatever reason, the market spikes up before you get a chance to buy back and your short-play backfires on that count. I haven’t looked into this myself but my gut-feeling is that the real world makes it not worth the hassle. That said, I’d be very interested to hear from anyone who had tried this.

  • 5 LearnFrench January 15, 2013, 2:31 pm

    Somewhat cunning but I did think that it seemed rather too good to work myself. Does the ex-dividend fall in share price actually equal the whole dividend amount or is it perhaps a bit less to take into account income tax losses? Although given that there are different income tax rates I imagine that this could get complicated.

  • 6 Matt the Newbie March 4, 2014, 9:34 am

    I’m new to investing (to date I’ve been a cash-ISA only man) but having had a good look at this website I’m really excited by the prospect of being a little more creative with my savings.

    However! I must confess I’m still confused by the tax treatment (and since I’m a tax lawyer that’s a little embarrassing). I understand that the accumulation units (or shares in the case of OEICs) might pay out dividends and automatically reinvest them for you out of convenience. If that’s the case then surely you would have to pay tax on the dividends, you would have more shares / units in your portfolio, and your base cost would increase (so although you get taxed on the dividend, at least you don’t have to pay capital gains tax on that element further down the line).

    But is that how all OEICs work? I’m specifically looking at the Vanguard Lifestrategy range of funds at the moment. Why would they pay out a dividend, and trigger tax, and reinvest it, when the money could simply stay in the fund and be reinvested without a tax charge on the individuals, which would then increase the capital value of the shares on which you pay CGT when you finally cash out.

    Even after looking at the Key Investor Info for one of the Vguard LS range I’m confused. It uses phrases like “income from the fund will be reinvested” which to my mind is ambiguous.

    Can anyone help?

  • 7 Matt the Newbie March 4, 2014, 1:24 pm

    I think I’ve answered my own question, but for the benefit of anyone who’s interested:

    The key is that legally OEICs have a special tax regime.

    It seems that if you have an equity fund (and painting with very broad brush strokes, this is a fund which doesn’t hold at least 60% of its assets in cash / gilts / similar approved investments, and very definitely not shares) then all of its distributions are treated as dividends for tax purposes AND (crucially) any income amount which is available for distribution by the fund (i.e. income from underlying investments) is automatically treated as if it were actually distributed, whether or not cash goes out to the shareholder. So this is why the fund doesn’t actually pay out a dividend and then reinvest it. The income is allocated to reinvest in the capital of the fund (without ever leaving the fund company) but is still treated as though distributed for tax purposes.

    So that’s satisfied my curiosity. Anyone who is similarly curious can have a flick through the Authorised Investment Funds (Tax) Regulations 2006.

  • 8 Mervyn July 10, 2014, 4:00 pm

    My understanding is that with ACC units, the number of units does not change, but the base cost should increase by the dividend amount. Was wondering if this increase is the net or gross dividend. And would the effective date of that increase be on the Ex or pay date? Any answers appreciated.

  • 9 Nigel HB October 23, 2015, 9:40 pm

    Very useful article. I have been investing small monthly amounts into an accumulating tracker fund since 2002, for the purpose of creating a college fund for my darling son. These were the days before junior ISA’s and child trust funds. I have kept the statements and tax vouchers, but never really understood the importance of the vouchers. It now seems that I have been a tax evader and if I want to offset capital gains tax when selling my fund ,when my son is 18 next year, I will have to tell the tax man about the accumulated dividends over the last 13 years.

    Any thoughts on that ?

  • 10 KEM February 17, 2016, 11:18 pm

    Your article says to deduct reinvested income from gain – I understand this but am not sure how much of reinvested dividends from accumulation fund can be deducted if only part of fund has been sold – and how much of these dividends have to be deducted from gain from future sales. Any help on this would be much appreciated.

  • 11 Richard March 31, 2016, 1:22 pm

    In order to take advantage of the new £5,000 dividend nil rate band for both me and my spouse, I would like to transfer to my spouse’s trading account, as a gift, some of the holdings in my own trading account. I am thinking to transfer shares in Vanguard FTSE U.K. All Share Index A. The income version of this fund will next pay a dividend at 31 December 2016. My accumulation version has this dividend reinvested. What I want to know is: what do I need to do to be sure that the tax on the dividend is owed by my partner, rather than me. Does it make any difference whether I transfer the fund to his account early in the year, say 10 April 2016, or later in the year, say at 10 November 2016?

    I am new to investing in the UK and have not yet seen how a UK tax reporting statement from my platform will look, so I do not yet understand how this works – if one owns shares in an accumulation shares of a fund for X% of a tax year, does that mean that one owes tax on X% of the annual dividend, or is it the case that the person who owns the shares at a certain point in the year (say when the income version goes ex-dividend) owes the tax on the entire dividend for the entire year? I hope you understand the question I am asking.

  • 12 The Accumulator April 1, 2016, 5:59 pm

    @ Richard – we could take our best guess but we’re not tax experts and I think that’s what you’d need for a definitive answer. It seems reasonable to me that your partner would be liable as long as the units are in their name by the time the dividend is paid (and the divi is announced for the acc fund the same as for the inc version) but that doesn’t mean HMRC would agree.

  • 13 Rob November 30, 2016, 12:01 am

    I am looking for the answer to Richard’s question (March 31 2016) – just wondering if he ever found out? Hopefully he might get an email if he is subscribed to posts on this page. If anyone else knows, would appreciate any pointers. Thanks.

  • 14 Sarah April 6, 2017, 6:23 pm

    Does anyone have info on Mervyn’s question from 2014 as I have the same question. I have accumulation units within an ISA and get info on accumulation fund distributions, but the number of units held does not increase. Just to complicate things I am in Canada and ISAs are not tax-free here. Am I correct to believe I have to declare distributions as income (income tax payable) but when I sell units the base cost should be increased by the value of all distributions made during the life of the units, although the number of units is unchanged?

  • 15 The Accumulator April 9, 2017, 7:50 pm

    Hi Sarah, you are right that the number of units doesn’t increase, they increase in value by the amount of the dividend. Accumulation dividends do count as taxable income if not tax sheltered. But you pay that’s liable to income tax not capital gains. Therefore when calculating any CGT liability, the reinvested income should be deducted from the apparent gain to work out the true capital gain. If you don’t do that then you are taxed twice. Nasty.

  • 16 Richard April 10, 2017, 2:36 pm

    Rob asked above if I had found the answer to my own questions. Yes, here are things I have discovered.

    Firstly, so long as I transfer the fund to my spouse’s ownership before a dividend is paid, then that entire dividend will accrue to my spouse’s tax liability, even if I had been holding the fund for most of the previous accounting period. (My spouse will go forward with the same capital gains basis that I had.)

    Secondly, funds (income and accumulation) can have their dividends paid with a so-called “equalisation” amount. This happens only in your first year of ownership of the purchased shares in the fund. The equalisation amount is a return of capital. It reduces the disadvantage of buying accrued dividends. The practical effect is that for an income fund your taxable dividend in this first year is decreased by the equalisation amount, and your cost basis (for your future capital gains tax calculations when selling) is also decreased by the equalisation amount. For an accumulation fund your taxable dividend in this first year is decreased by this amount, but the cost basis is unaffected.

    Not all funds operate an equalisation regime. For example, Fundsmith Equity does not, whereas Vanguard FTSE all share does.

    ETF and company shares also do not operate any equalisation. So if you buy an ETF/share just before its ex-dividend date, you are effectively buying the next dividend, which will be returned to you in just a couple weeks. This means you will incur a small amount of dividend tax on money that has not really been invested at all long. The equalisation regime operated by funds helps eliminate this infelicity.

  • 17 Richard Weber January 9, 2020, 11:50 am

    Does anyone know how to find the tax reportable income for a Vanguard accumulation ETF such as “FTSE All-World UCITS ETF (USD) Accumulating (VWRA)”? One the Vanguard web pages I can find only information for the income version of this ETF, named VWRL, IE00B3RBWM25. Is one supposed to simply add up all the income reported for VWRL? See https://global.vanguard.com/documents/institutional/vf-plc-excess-reportable-income-30-june-2019.pdf

  • 18 The Accumulator January 9, 2020, 9:10 pm

    Hi Richard, I recommend asking Vanguard directly. They may tell you the Accumulating ETF doesn’t pay dividends.
    Some Acc ETFs report distributions, some don’t. Why the non-reporting ones don’t, and whether that’s OK with HMRC is a mystery I haven’t got to the bottom of.

    Investegate have a useful tool for discovering dividend announcements:

    https://www.investegate.co.uk/AdvancedSearch.aspx?qsArticleType=news

    Company news > Advanced Search > Article type = Announcements, All Categories = Dividends, search by company name e.g. Vanguard.

  • 19 Pete February 17, 2020, 5:56 pm

    Highly interesting article however I am confused.

    I have owned units in the Vanguard Lifestrategy 60% Equity Accumulation fund for the past 12 months. I have used the following notional distribution per unit figure (https://www.trustnet.com/factsheets/o/acdq/vanguard-lifestrategy-60-equity) and thus calculated the gross distribution applied to my holding on 31/05/2019 (fund distribution date). I have subsequently used the notional distribution per unit figure as an off-set against gains when selling.

    I spoke with a Vanguard representative to double check the notional distribution per unit figure from the Trustnet website. The representative could not provide this figure and thus requested that I contact my broker. Upon contacting my broker they too could not provide a figure however they did state the ACC fund class is not subject to dividend taxation. Is the broker correct?

    I would be highly appreciative of anyone who may offer some clarity on this!

  • 20 Ramzez February 9, 2021, 11:51 am

    LearnFrench, isn’t there a 30 days rule as well if you sell and buy the same asset within 30 days it would tigger income tax not capital gain.

  • 21 Genghis February 9, 2021, 12:22 pm

    @Ramzez. It’s complicated. It depends whether you’re deemed to be carrying out a “trade” of dealing in securities. Trade = income tax (assuming not incorporated), non-trade = capital gains, except for dividends / coupons etc.
    https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim56860

  • 22 The Rhino February 9, 2021, 12:38 pm

    I suffered a bit doing the old tax return this time round as had to square away CGT on accumulating units (also had to muck about with ERI on ETFs which I begrudged as numbers turned out tiny). It was doable but not super pleasant.

    I was lucky in that I got a bit of help from this community and an IFA mate to add some confidence that I was ‘doing the right things’, but what I did note while scouting around for assistance was another mate (20 years in investment banking) who confidently told me just buy acc units then you don’t have to worry about any dividend tax. There is a lot of confusion out there, even from those who you’d expect to have a handle on it.

  • 23 The Investor February 9, 2021, 1:13 pm

    @The Rhino — Absolutely. I didn’t actually know about this until @TA brought it to my attention all those years ago. I thought he was just being finickety! Set against that, who knows if/how often HMRC actually tracks anyone in the small fry category for non-payment. Also I’d hope most people have now got most of their funds in ISAs/SIPPs by now, so it’s clearly a minority concern.

    For that minority (older, had a lot of assets perhaps in the old generous dividend allowance days, or anyone who comes into a lot of wealth suddenly) it remains a live issue though.

    And yeah, aside from the fact that everyone should be paying their taxes due when they’re due (after taking any legal mitigation steps) you wouldn’t want to find HMRC calling after 20 years of compounded Acc unit reinvestment and asking to see your sums. The bill due might be less painful than the paperwork/hassle! 🙁

  • 24 Al Cam February 9, 2021, 1:20 pm

    I always thought the easiest way to go was:
    a) for DC/SIPP/ISA’s – use accumulation units; and
    b) for taxable accounts e.g. GIA – use income units.
    Tax reporting is then relatively straight-forward and any income needs can be met from dividends and/or selling units. If/when there are no income needs any dividends can be re-invested as and when and they may also assist with any re-balancing required.

    What have I missed?

  • 25 Foxy February 9, 2021, 1:45 pm

    It’s exactly that reason I recommend to a) avoid Accumulation flavour b) avoid mixing up Dividends/Interest in the same fund (i.e. Lifestrategy) in GIA accounts or when investing through a limited company.

    I find that Vanguard when investing directly (not via the online website) gives some very decent reporting by post. There’s a £100k minimum/fund though.

  • 26 tom_grlla February 9, 2021, 2:18 pm

    This is such a great and important article, thank you. I am fairly up on tax, but still struggle with this.

    For a while I used to get the Acc Divis on my TR, but would forget to deduct them on Capital Gains.

    I suppose if one wants to be really comprehensive (though it’s a separate issue from this), there is sometimes also Equalisation to deal with – for most people it will be a tiny sum, but I think this should be deducted from the Acquisition Cost when doing CGT calcs.

    It is also not helped by the fact that so few online brokers do Accumulation Divi reporting (and even fewer do Excess Reportable Income…). It really should be mandatory.

  • 27 Lesley February 9, 2021, 3:22 pm

    In line with another comment are you sure this article is correct ? It seems ridiculously too complicated and impossible to enforce in reality surely below is the tax position

    Income shares : you pay tax on the dividend in the tax year it’s paid out

    Accumulation shares : you pay CGT only when you sell . The difference is simply the value you bought off the value you sellleaving the profit which includes the rise in share price plus any reinvested dividends ? Is the issue perhaps when you sell shares you don’t know this amount ? In my H&L account I get a read out of what they cost versus any profit or loss as total and percentage (which would include share price increase and reinvested dividend ) if I had £10k which had gone up by 10% would my cgt not simply be 10% of whatever I sell ?

  • 28 FM February 9, 2021, 5:09 pm

    My long term objective has always been to have the majority of investments in an ISA, to make life simple for myself in future especially as I get older. I don’t want to be doing CGT calculations and unnecessarily complex income tax returns when I get in to my eighties. I have just spent 2 weeks solid doing the CGT calculations on a relative’s portfolio after finding the ‘financial adviser’ had not ensured that my relative fully understood the possible CGT implications of selling the entire portfolio, which had remained static for a decade, and reinvesting in completely different funds. To make matters worse, units from one fund were sold each month to pay the horrendous fees and then the platform gave a rebate which was reinvested in the same units triggering the 30 day rule multiple times. The only plus point is that the platform did provide excellent transaction and tax records for the whole period. Not something that I would ever wish to repeat!

  • 29 DCF February 9, 2021, 5:14 pm

    Interesting article and thread – thanks. I hold non tax sheltered acc units in funds (Vanguard LS) but given the complexity, potential for accidental mistakes and to make sure I avoid any CGT I tend to churn investments under the annual CGT allowance (and therefore don’t worry about the dividend adjustment in the CGT calc) for me and my wife with some then going into annual ISAs and some (if need be) going back into unsheltered funds. Obviously may mean a short time out of the market but incidental in the scheme of thing imho. This together with divi allowances and personal allowances (as mentioned) works for me. May not work for those with much bigger portfolios / gains / divi income of course.

  • 30 David C February 9, 2021, 6:13 pm

    @Lesley
    I’m afraid that being “ridiculously too complicated and impossible to enforce in reality” doesn’t always stop something being written into the tax rules.

    I came to the same conclusion as others, if only for the sake of simpler book-keeping: acc units in the ISA/SIPP; inc units in taxable accounts. Are there any major snags with that approach?

  • 31 February February 9, 2021, 6:29 pm

    Very interesting article.
    Is it OK to sell my unsheltered Vanguard Global All Cap (accumulation) and immediately buy Vanguard Global All Cap (income) or do I break the Capital Gains 30 day rule?
    Are they classed as different funds or am I pushing my luck?

  • 32 NewInvestor February 9, 2021, 7:27 pm

    @David C

    Are there any major snags with that approach?

    Possibly excess reportable income which TA mentions. For example, Vanguard declared for VWRL an amount of $0.1147 per unit in their June 2020 report. See https://www.vanguardinvestor.co.uk/content/documents/legal/vf-plc-excess-reportable-income-30-june-2020.pdf

  • 33 NearlyThere February 10, 2021, 9:07 am

    @February I think this is set out in https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm16210, which seems to depend on whether it is a reporting fund or not. I researched this some time ago but never actually needed to rely on it. Something like pruadvisor or old mutual may have a more intelligible interpretation.

  • 34 Genghis February 10, 2021, 10:17 am

    @February. There’s been lots of discussion on this elsewhere (https://forums.moneysavingexpert.com/discussion/comment/73461090#Comment_73461090) so I’ll let you read the arguments. In short though, maybe, maybe not. I wouldn’t. Can you bed and spouse?

  • 35 Matthew February 10, 2021, 12:07 pm

    I can’t see HMRC scouring trustnet to check that everyone’s telling the truth, if it’s hard for us to know or our brokers to know you can imagine what it must be like for hmrc. So as wrong as evasion may be you can bet that people are doing it, knowingly or not, if hmrc wants to collect on this (and to save us the hassle of checking) then they should regulate to make brokers keep track of dividends and capital gains (carried forward when switching) and tell both us and HMRC what incomes or losses were involved in a sale in a gia, then it can be down to us to declare anything else. If it’s automatic it might overall save hmrc manpower in investigating

  • 36 Jason February 10, 2021, 10:10 pm

    I have a query. I have one fund in an unsheltered account.

    I chose an income fund, based on advice from a previous post here, so this should simplify things.

    I invested with a flat fee broker. From reading @FM’S experience with the platform selling to pay fees and the 30 day rule, I may have got lucky here with my choice of platform.

    My choice of fund was LifeStrategy 80, chosen mainly so it didn’t need to be rebalanced. I’ve started to get a little concerned about the UK bias and I’ve realised I could have rebalanced by adjusting my ISA holdings to balance across the two accounts (GI/ISA).

    My query is whether I’m likely to have tax return headaches with the split of equities/bond (dividends/interest) in the LS fund as briefly mentioned by @Foxy. Although @Matt the Newbie did mention that this was only an issue if bonds/cash are 60% or greater in with the fund. Do I also have to account for interest or just dividends?

    Any thoughts/comments/experiences are greatly appreciated.

    Thanks, J

  • 37 Tim Hughes February 11, 2021, 2:18 am

    Just trying to nail down how to handle accumulating ETFs…

    If I hold some VHVG (Vanguard FTSE Developed World UCITS ETF GBP Accumulating) I’m looking for the (notional) dividend and any ERI. Where do I look?

    I have managed to find some data for the USD version (ISIN IE00BK5BQV03) in their UK Reporting Fund Status document (https://www.vanguardinvestor.co.uk/content/documents/legal/vf-plc-excess-reportable-income-30-june-2020.pdf) which shows no income but ERI of 0.8994 (presumably USD).

    The equivalent distributing fund shows distributions of 1.1304 and ERI of 0.0733.

    Is there effectively no dividend for the accumulating fund just the ERI? Or do I need to look somewhere else?

  • 38 Naeclue February 11, 2021, 2:33 pm

    @Matthew and others, brokers statements cannot be relied upon and it would be impossible for them to properly work out your tax situation unless they knew everything about you. Simple example, lets say I hold an investment with 2 different brokers. When I sell part of a holding, what is the CGT liability? The broker cannot know that unless they know the combined cost of the holding across both brokers and any other gains made in the financial year. If the investment was then bought back at the other broker within 30 days, the calculation would be within the 30 day rule, which neither broker would know about.

    Personally I prefer to hold income paying ETFs outside tax shelters instead of OEICS as OEICS have the extra complexity of equalisation payments to deal with. Excess reportable income does still need to be taken account of for income tax and CGT on disposal though. Swings and roundabouts, but that way I only have one type of anomaly to worry about.

  • 39 Naeclue February 11, 2021, 2:58 pm

    @Tim Hughes, yes $0.8994 per share is your income, considered to have been paid on 31 December 2020. You need to convert that to pounds, which you can do using the official HMRC exchange rates here

    https://www.gov.uk/government/publications/hmrc-exchange-rates-for-2020-monthly

    Remember as well to add the excess reportable income into your cost of purchase to reduce your eventual CGT liability. With accumulating ETFs this may make a material difference.

    In case you did not already know, these ETFs are offshore investments, so strictly speaking you need to include them into the offshore pages in your tax return. It makes no difference to your tax liability though as there is no withholding tax.

  • 40 Tim Hughes February 14, 2021, 1:44 am

    Thanks @Naeclue.

    I have no problem handling the GBP/USD conversion, the ERI increase to base cost for CGT, and the offshore-ness (already having to cope with these for other investments…).

    Just wanted to check there were no “internal” dividends as you’d get with Vanguard accumulating funds.

Leave a Comment